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Volatility is Back

DAVE FISHWICK AND STUART CANNING, MACRO INVESTMENT BUSINESS, M&G INVESTMENTS

But this time it’s different

COMMENTARY

Macro investors should not be surprised by the changing nature of price action

In recent years, macro strategies have been criticised for delivering disappointing absolute returns. In 2017, one reason given for this was the lack of volatility in markets. So far in 2018 we have seen a resurgence of volatility, but apparently for many, it would seem to be of the ‘wrong type.’ I would argue that both these explanations for disappointing returns are incomplete, and that we should instead be looking to explain developments as reflections of a profound shift in the market environment and investor psychology. Understanding these shifts will be critical both for return generation, and risk management on a multiyear perspective, not just for macro managers, but for all investors.

In the middle of 2016, I wrote in this publication about my belief that investors would soon need a material change in thinking and behaviour (‘A Pivotal Moment’, June 2016). At that point, the combination of growth pessimism and a myopic desire to avoid short-term volatility had reached what will likely turn out to be their peak. Investment strategies which could avoid being correlated with drawdowns in ‘risky’ assets or, better still, offer protection in these periods were prioritised over those that might generate higher returns over the longer run.

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